Tags: Payroll Taxes

How Can D.C. Make New Employees More Cost-Effective?


Earlier this week we discussed the ugly truth about our economic doldrums: that companies aren’t hiring because they don’t think that the additional revenue that they can generate from a new hire is enough to cover the cost of the new employee — not merely wages and benefits, but capital expenditures, training, overhead, regulatory costs, and so on.

In this light, raising the national minimum wage to $9/hour from the current $7.25 is counterproductive. If companies are reluctant to hire people at the current cost, making them $1.75/hour more expensive isn’t going to make them a more appealing option. This may not be a huge factor, but it certainly won’t help.

In the Washington Post, Robert Shapiro, undersecretary of commerce for economic affairs in the Clinton administration, correctly identifies what should be on the minds of policymakers: “The best approach would be to directly reduce the cost for business to create more jobs.”

The problem is that his solution is pretty bad: “Congress could, for example, permanently cut the payroll tax rate for employers and make up the difference for the Social Security trust fund with a modest carbon or value-added tax.”

The payroll tax is 12.4 percent, with 6.2 percent paid by the employer and 6.2 percent paid by the employee. (For 2011 and 2012, the employee paid 4.2 percent.) But it’s hard to believe that high payroll taxes are a primary factor in slow hiring since 2008–09; the rate has been at 12.4 percent since 1990 and above 10 percent since 1979.

Employers may see new hires as too expensive to be worth it, but it’s not the 6.2 percent payroll tax that’s creating that perception. Most likely it’s the much higher health-care costs and training costs. Shapiro briefly mentions the traditional answers of “electronic medical records” and “preventative care.” Except that new studies about the effect of electronic medical records find “evidence of significant savings is scant, and there is increasing concern that electronic records have actually added to costs by making it easier to bill more for some services.”

As for preventative care . . . well, all those tests to detect health problems early that come back negative cost money, too: “The evidence of hundreds of studies over the past four decades has consistently shown that most preventive interventions add more to medical spending than they save.” And this is just for health problems that can be prevented; accidents, gunshot wounds, some diseases, etc.

As for the other idea, creation of a national carbon or value-added tax would make every product instantly more expensive, with horrific results for discretionary spending, purchasing power, and so on.

Tags: Economy , Minimum Wage , Payroll Taxes

POOF! The Democrats’ Favorite Tax Argument, Used Since 2001, Gone!


The final Morning Jolt of the week includes a quiet backtrack, a prominent conservative columnist taking an . . . unexpected turn, and this assessment of future tax debates:

After a Frustrating Tax Concession, Much Friendlier Political Terrain in 2013

So to those of us who want the federal government to tax as little as possible and control its spending, raising taxes on individuals making more than $400,000, or households making more than $450,000 from 36 percent to 39.6 percent stinks. But that 3.6 percentage point tax hike on top earners has been the alpha and omega of Democratic tax increase arguments since, oh, the Bush tax cuts went into effect in 2001.

They kept emphasizing that hiking to that rate couldn’t be economically harmful, because that was the top tax rate during the good old days of the dot-com boom of the late 1990s – as if tax rates were the only factor determining the strength of an economy.

Obama kept emphasizing how he simply wanted to “ask the rich to pay just a little bit more.” (If somebody asks you to give them 3.6 percent of your annual income, ask yourself if you would really see that amount as “a little bit more.”) Inherent in Obama’s approach is an acknowledgement that the argument, “we’re asking the rich to pay a whole lot more, gobs and gobs more in new taxes” isn’t a sure-fire applause line.

So as we head into the debate over raising the debt ceiling, Democrats find themselves without the rhetorical and policy tool that they’ve come to depend upon – almost entirely, when you think about it – for the past twelve years.


“This does settle the issue of rates for individuals,” Rep. Allyson Schwartz (D-Pa.) told POLITICO. “That’s good. That certainty and predictability is one of the gains” of the fiscal cliff legislation.

Michigan Rep. Sander Levin, the top Democrat on the tax-writing Ways and Means Committee, agreed. When asked whether more rate increases are in the offing, he responded, “I don’t foresee that.”

That Politico article goes on to quote Maryland Rep. Chris Van Hollen, the top Democrat on the Budget Committee as saying, “we’ve got to make some cuts going forward, but we also need additional revenue.”

Looks like a pretty slam-dunk counter-argument for Republicans: “Why the hell are you guys talking about raising taxes on the richest Americans again? We just did that at the beginning of the year! We haven’t even reached the annual tax-filing deadline of April 16, and your calcified one-track minds are coming back with the exact same policy recommendations that you insisted would fix the problem before!”

And just think, this debate will occur as everyone in America sees their paychecks get 2 percent smaller (at least on the first $110,000 of income) because of the expiration of the temporary reduction in the payroll tax from 6.2 percent to 4.2 percent. (Here’s one Democratic Underground commenter exclaiming with surprise, “My paycheck just went down by an amount that I don’t feel comfortable with.”)

One of the fundamental reasons that “raise taxes on the rich” is less popular than Democrats want is the public’s well-founded wariness of just what income level constitutes “rich” in the eyes of lawmakers.

Obama is proudly proclaiming that he saved the middle class from a tax hike, and that he only raised taxes on the rich. But since most voters perceive their taxes in aggregate – that is, what’s left on their pay stub after everybody takes their bite – they’ll probably perceive the opposite, that an income-tax hike supposedly targeting the rich made their paychecks 2 percent smaller. Thus, they’ll be even more skeptical than usual, since they’ll think the last tax hike on “the rich” hit them instead.

(By the way, “rich” may be in the eye of the beholder, but I think you’ll find more consensus that a household income of $450,000 or single income of $400,000 annually is a fair definition of “rich” than defining it at $250,000. There are nearly five million households that earn between $200,000 and $500,000 annually.)

Megan McArdle:

Overall, I don’t see a lot of Democratic enthusiasm for further actual tax increases. I see a lot of enthusiasm for “raising taxes on the rich” as a theoretical construct which, like “American exceptionalism”, can be vigorously waved in speeches and then put back in the vault for safekeeping as soon as everyone’s seen that you’re the right sort of person who believes in good things.

The problem, of course, is that Democrats want a big government that does a lot of things. For the past few years there’s been a widening disconnect between the tax cuts that Republicans say they want, and the spending cuts they are willing to actually deliver. Having achieved the tax hikes on the rich that they campaigned on, Democrats are not in exactly the same boat–but it does look pretty similar. They want a big government with a generous welfare state, and a tax base that’s about half the necessary size.

Peter Orzag, President Obama’s former budget director said on CNBC Thursday morning that, “I think the White House in this second-best world won that round, but by not insisting that the debt limit be tied to that package it’s entirely possible they’re going to win the week and lose the quarter. You can’t know yet until you see how February and March play out, and I think there’s no doubt they have somewhat less leverage than they did in the round that just completed.”

Tags: Barack Obama , Chris Van Hollen , Payroll Taxes , Taxes

Obama Already Getting Flak for the Payroll Tax Hike


I’m fascinated by the coverage of the expiration of the payroll tax cuts this morning; it is being treated as major failure of Congress and the president, and a bit of fiscal doom for the New Year.

Amy Davidson writes in The New Yorker:

Cuts to the already highly regressive payroll tax are being allowed to expire, meaning that they will rise from 4.2 per cent to 6.2 per cent. Obama didn’t even fight for them. In his statement Tuesday night, Obama described the bill as “preventing a middle-class tax hike” that could have hurt families and sent the country back into a recession; that is true, but it allowed another middle-class tax hike that could have the same effect. He also said that middle-class families “will not see their income taxes go up.” That is false, unless one goes along with the idea — and most of Washington does — that payroll taxes, which are on income and levied by the federal government, are not federal income taxes.

But was there ever any serious discussion of extending the payroll tax cut? As the AP notes, “it was never fully embraced by either party, and this time around, there was general agreement to let it expire.”

Maybe the expiration of the payroll tax cut really will amount to a significant economic hit in 2013:

The so-called payroll tax is scheduled to bounce back up to 6.2 percent this year from 4.2 percent in 2011 and 2012, amounting to a $1,000 tax increase for someone earning $50,000 a year.

“It’s a huge hit,” says Joel Naroff, president of Naroff Economic Advisors. “It hits people whether they’re making $10,000 or they’re making $2 million. It doesn’t matter who you are . . . The lower your income, the more of your income you’re (spending). So if your taxes go up, it’s going to come out of your spending.” And that is bad news for an economy that is 70 percent consumer spending.

Mark Zandi, chief economist at Moody’s Analytics, calculates that the higher payroll tax will reduce economic growth by 0.6 percentage points in 2013. The other possible tax increases — including higher taxes on household incomes above $450,000 a year — will slice just 0.15 percentage points off annual growth, Zandi said.It was designed to be temporary.

As a guy who prefers to pay as little in taxes as legally possible, I’m not happy to see the payroll tax go up. Heck, I wanted the entire tax suspended entirely back in 2009. But this 2 percent cut was always designed to be temporary; if anyone in Washington wanted the tax rate permanently lowered to 4.2 percent, they should have introduced legislation to do that and passed that.

Perhaps this — along with the rest of the fiscal cliff-hanger — will be a useful lesson about “temporary” tax changes. Congress usually enacts them to provide a spark to the economy, and intends to end them once the economy is in better shape. But the economy is rarely in such great health that taxes can be raised without some sort of deleterious impact; as we may experience, taxes jump back up before there’s a robust recovery and the hikes cause the economy to sputter again. (In this light, the permanency of the Bush tax cuts for those making less than $450,000 per year may be one of the most significant economic reforms in the recent era.)

Either way, as no less an Obama-friendly entity than The New Yorker has declared, President Obama has now raised taxes on all working Americans.

UPDATE: What happens when Obama returns from Hawaii and takes a victory lap for this deal, telling the American public that he saved the Middle Class tax cut, prevented millions of Americans from losing much-needed tax relief, etc., at the precise moment they’re finding their paychecks are 2 percent smaller?

Tags: Barack Obama , Payroll Taxes

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